By Glen Korstrom
Business owners watching sales slide because of the HST say Ottawa’s plan to raise payroll taxes 8.6% in January 2011 is ill-timed.
“We’re still in a recession and the economy is just trying to build itself up,” said Ron Zalko Total Body Fitness and Yoga owner Ron Zalko.
“Payroll taxes are high the way they are. It would be a job-killer to raise them.”
To fund the employment insurance system, business owners currently pay $2.42 in payroll taxes for each $100 they pay staff and employees pay $1.73 for each $100 they earn.
Customers have become hesitant to spend money since the HST came into effect July 1, Zalko said.
Statistics Canada numbers back his belief. Data released September 22 shows that B.C. retail sales fell 0.4% in July.
Combine this tougher sales climate with a payroll tax hike and Zalko said that many business owners will rethink how many hours they can afford to have staff work.
His gym remains profitable, but he believes payroll taxes affect business growth more than any other levy.
He’s not alone.
A 2007 Canadian Federation of Independent Business (CFIB) survey of 7,845 business owners found that 62.8% think hiking payroll taxes will stunt business growth.
In comparison:
- 53.6% said corporate income taxes would stall business growth;
- 47.2% thought property or capital taxes would slow growth; and
- 42.9% said personal income taxes would keep businesses from expanding (see graph).
That’s because payroll taxes are a hiring deterrent, explained Moda Painting principal Jason Pittelli.
“If we as owners have to put in a few extra hours ourselves so we don’t have to pay that tax, then we’ll do it.”
Pittellli added that payroll taxes will also push more work into the underground economy.
He said he’s seen a rise in the number of people offering to have him perform jobs under the table since the HST came into effect. Pittelli believes that if he has to raise his prices to reflect a rise in payroll taxes, demand for black-market paint jobs will increase.
The Canada Employment Insurance Financing Board is recommending the federal government increase payroll taxes to minimize the amount of time the EI fund runs a deficit.
Ottawa provided $2 billion in 2008 when it established that fund as an independently managed entity. High unemployment since then has pushed the fund $10 billion into debt, said Brian Bonney, who is the CFIB’s B.C. director of provincial affairs.
The CFIB projects that unless something is done the fund’s deficit will reach $14.7 billion by 2012.
The fund’s board is therefore recommending the maximum allowable hike in payroll taxes in 2011.
But Bonney said there are better ways to rein in deficits.
For example, the federal government could take money out of general revenue and put it into the fund.
That’s justified, Bonney said, given that successive federal governments gutted what was a $57 billion surplus in the previous EI program and funnelled that money into general revenue to balance budgets in the 1990s and early 2000s.
“We’re being politically realistic,” Bonney said. “The government is making strong indications that they are moving to an area more to restraint now and that they feel the recession is over. So, the political reality of [Ottawa subsidizing the fund] is probably slim.”
Bonney said the federal government could also allow the EI fund’s board to borrow money, which it’s currently prohibited from doing.
“Allow the fund to go and borrow against future surpluses as a separate entity [from the federal government] at the lowest interest rates we’ve seen in decades. Allow it to be in deficit for a longer period. Eventually, the fund will definitely go back into surplus.”
Although the EI fund is run independently, any annual deficit it incurs appears on federal government books.
Bonney’s confidence that the fund will return to surpluses stems from the fact that it amassed a $57 billion surplus during the boom years of the 1990s and the mid-2000s.
Government efforts to stem the flow of red ink in the EI fund have included cancelling, effective September 11, the extra five weeks of regular EI benefits that it introduced last year and ending a program that provided up to 20 additional weeks of benefits for longer-serving employees.